Categories:
Income Distribution
When you take into account the loss of means-tested benefits (e.g., cash assistance, food stamps, housing subsidies, and health insurance), and the taxes that people pay on earned income, the return to working is essentially zero for those in the lower two quintiles of the income distribution.
Read the whole thing. And note that Greg Mankiw shows that health care reform will make this worse. For that matter, so might health care vouchers.
There are two potential solutions. One solution is to base eligibility for means-tested benefits on total income, including other government benefits programs. Another approach would be to abolish a lot of specific programs and replace them with generic cash assistance.
READER COMMENTS
Floccina
Nov 11 2009 at 12:44pm
I seems to me that if the specific programs were abolished and replaced them with generic cash assistance we would get off much much cheaper. Unfortunately the median voter does not trust the poor enough to give them cash and the politicians like to have lots of different programs to point to.
Robert Johnson
Nov 11 2009 at 2:07pm
Floccina,
That’s an interesting point about not trusting the poor enough to give them cash. After all, if you give the poor a voucher, or the actual thing/service, doesn’t that displace their need to use cash for that thing/service? So, aren’t their (perhaps meager) cash reserves then freed up for other uses anyway (e.g. drugs or whatever)? How is that different from giving them cash? Oh right, because the value of a voucher (or the thing/service itself) is lower than the cash equivalent, because of lower convertibility. Wait…that’s not a good thing.
Yeah, we need to subsidize education. Clearly the market is not providing enough basic economic instruction to the masses.
Rolo Tomasi
Nov 11 2009 at 3:10pm
Milton Friedman wrote about negative income taxes over 30 years ago when he wrote Free to Choose.
Unfortunately it is too difficult to meddle with and hide graft in such a simple system, otherwise it might be in place today.
david
Nov 11 2009 at 3:20pm
@Robert Johnson
Nobody said that the mistrust was justified.
Thirty-five million Americans draw food stamps. At least a hundred of those, if given equivalents in cash instead, would grab the money and do something mind-bendingly stupid in front of an obliging FOX camera. Cue rage against lazy welfare queens.
The dimmer elements on the left tend not to grasp that vouchers displace cash, but the dimmer elements on the right don’t, either. Therefore vouchers, which make both camps happier. Economic illiteracy is a universal constant.
Obviously an economically literate dictator/electorate would act differently, but we don’t live in that world.
Jesse
Nov 11 2009 at 3:37pm
Milton Friedman wrote about negative income taxes over 30 years ago when he wrote Free to Choose.
Yeah, if we had a negative income tax in place, then all the concerns about high implicit marginal tax rates fly out the window. Whee!
John Fast
Nov 11 2009 at 5:22pm
What about making such vouchers universal, i.e. not means-tested? In that way, there will still be a net benefit, and hence an incentive, for having a higher gross income. (Hey, it’s all about the marginal rates.)
Brian 2
Nov 11 2009 at 6:33pm
[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog.–Econlib Ed.]
Pants
Nov 12 2009 at 11:39am
I don’t know what percentage of families have someone receiving Pell Grants, but that would be another thing to consider. I know we did in our household when my wife went back to school full time. Our financial situation would have been nearly the same whether I worked full time or part time. Guess which I chose.
Tom West
Nov 12 2009 at 12:36pm
Okay, maybe someone can clarify the hate against vouchers.
We, the supplier, want to provide what *we* deem valuable (food, childhood education, etc.) to the poor because we feel badly when they go without those items.
Now, if we give cash and they purchase what they really desire which might not include the items we deemed necessary, we still feel bad that they are missing what we deem the necessary requirements.
Until we are willing to let people suffer the consequences of their own actions (which, as a society, we are not), then vouchers seem to be the best way of allowing some flexibility while ensuring the needs of the donors are met.
Am I missing something?
Eshan
Nov 12 2009 at 2:05pm
I’m not sure these cash vs voucher arguments are correct. Let’s say Debra Druggie has an income of $100/week. As a “responsible” drug addict, she spends $50 on education and $50 on drugs. Then, we give her a $50 voucher to spend on education. This displaces her old $50 expense on education, so she now spends $100 on drugs. In this scenario, cash and voucher are equivalent.
What if she weren’t as responsible? What if she spent all $100/week on drugs, and she wants to spend the next $50 cash she encountered on drugs as well? She still has no choice but to spend the $50 voucher on education. In this way, a voucher instead of cash could theoretically improve the outcome.
Charlie
Nov 12 2009 at 8:27pm
I think the state taxes, specifically, the sales taxes change this. There was a Kotlikoff paper about this that said every group was taxed around 40%.
http://articles.moneycentral.msn.com/Taxes/Advice/YourRealTaxRate40.aspx
Charlie
Nov 12 2009 at 8:28pm
Here is a draft of the paper.
http://people.bu.edu/kotlikoff/Does%20It%20Pay%20to%20Work%20and%20Save,%20December%209,2006.pdf
A Serrano
Nov 13 2009 at 8:30pm
Healthcare reform will not necessarily make these problems worse. Right now, if someone works more hours, and the extra income puts them over the threshold for Medicaid eligibility, that person will lose their health insurance altogether. Replacing this Medicaid “notch” with a health insurance subsidy could improve the returns to work, even if it raises the implicit marginal tax rate as the subsidy is reduced with income.
Comments are closed.